If you’re looking to buy a house or ways to pay off your home loan faster, you’ll likely have read about an offset account. We’ll break down what an offset account is, eligibility, how best to use one and how to get set up.
What is an offset account?
An offset links a transaction account, like a NAB Classic Banking account, to your variable rate home loan. It uses the money in that account to ‘offset’ your loan balance. This is how you can pay less interest with an offset account. The more money you have in the offset account, the less interest you pay on your home loan.
Think about a standard home loan. You’re paying interest on the total amount still owing. With an offset, interest is charged on the difference between your home loan balance minus the amount in your linked offset account. You’re simply linking your home loan to a transaction account for lowered interest.
An example of how an offset account works
Say you’ve taken out a 25-year mortgage for $500,000. Now, suppose you pay an average interest rate of 3.5% p.a.
We’re going to assume you have, on average, $10,000 sitting in your linked account.
Over the life of your loan, you’d save $13,663. Effectively, you end up paying off your loan sooner – your 25-year mortgage ending 5 months early.
Benefits and limitations of an offset account
Your home loan interest is worked out each day, calculated on the balance of your loan (and then charged monthly).
If you’re a customer with an offset account, every dollar you have in your linked transaction account saves you interest every day that it’s there. Maintaining a balance of a few hundred dollars can save thousands in interest. For example, assume an average balance of just $500. On a $500,000 home loan over 25 years (and at an average interest of 3.5% p.a.), you’ll save approximately $700.
Offset account limitations
An offset account is a convenient way to save yourself money on your home loan, but there are some limitations and alternatives to consider.
You can also reduce the interest on your variable rate home loan by making extra repayments. There’s no difference in the money that you'll save when compared to an offset; however making extra repayments to reduce your home loan balance may be a better option for you. This can help if you want to:
- increase the equity in your home
- reduce your loan repayments
- keep your savings out of sight, out of mind.
How to use an offset account
If you’re not sure how much to put in your offset account or how to use one effectively, here are a few ways to help you get the most out of an offset account.
Calculate your potential interest savings
Our loan repayments calculator lets you customise a loan using several variables – loan amount, term, interest rate, and more.
You can also enter how much (on average) you’ll have in your offset account. This will show you the savings you can make—and how much sooner you could pay off your loan.
Keep as much money in your offset as possible
Since every dollar (every day) saves you interest, it makes sense to keep as much of your extra savings in your offset account as you can, for as long as possible.
Here are two simple ways you can make offset work better for you:
Have your salary paid into your offset
Whether it’s your salary or any other deposits, having it paid into your offset account will immediately reduce the interest you pay on your home loan. Even if it’s only there for a day or two, it makes a difference. Download our Salary transfer form (PDF, 246KB), opens in new window to move over your pay easily.
Take advantage of interest-free days on your NAB credit card
By using your NAB credit card for everyday purchases and then paying the full closing balance, or if you have a balance transfer the 'interest free days payment', by the due date each month, you keep your money in your offset account longer – offsetting interest on your home loan.
Tip: Set-up a direct debit from your offset account to ensure you always pay the full balance of your NAB credit card on time.
How to set up an offset account
You can generally only get offset on variable loans. If your home loan is eligible, linking a new or an existing account is easy from the NAB app. Once you’ve got the app open, follow these steps:
1. Select your home loan account from the My accounts screen.
2. Tap the Manage button in the top-right corner of the screen.
3. Scroll down to panel called Linked offset accounts and click the button Change my offset account.
4. Select an eligible transaction account from the list.
5. Once complete, you’ll see a confirmation that the request has been processed. You’ll be able to see the balance of your offset account from within NAB Internet Banking.
If your home loan isn't already linked, you’re unsure or just want to see if you can add an offset account to your loan, talk to your banker, or call us on 13 22 65.
Options if your loan doesn’t offer 100% offset
If you have a fixed rate home loan, your options are limited. Fixed rate home loans aren’t eligible for linking to an offset account. At the end of your fixed rate period, your loan will shift onto a variable interest rate. When this happens, you can consider getting an offset account.
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The information contained in this article is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, NAB recommends that you consider whether it is appropriate for your circumstances. NAB recommends that you seek independent legal, financial and taxation advice before acting on any information in this article.
Target Market Determinations for these products are available at nab.com.au/TMD.